Perpetual Money

From the file marked, “Studies that Never Had to be Studied,” comes this summary of a research paper from EconoPhysics forum:

We argue that the present crisis and stalling economy continuing since 2007 are rooted in the delusionary belief in policies based on a “perpetual money machine” type of thinking. We document strong evidence that, since the early 1980s, consumption has been increasingly funded by smaller savings, booming financial profits, wealth extracted from house price appreciation and explosive debt. This is in stark contrast with the productivity-fueled growth that was seen in the 1950s and 1960s.

I wonder how much this study cost. It gets better:

Rather than still hoping that real wealth will come out of money creation, we need fundamentally new ways of thinking. In uncertain times, it is essential, more than ever, to think in scenarios: what can happen in the future, and, what would be the effect on your wealth and capital? How can you protect against adverse scenarios? We thus end by examining the question “what can we do?” from the macro level, discussing the fundamental issue of incentives and of constructing and predicting scenarios as well as developing investment insights.

Yes, rather.

Isn’t it nice to read common sense all dressed up in formal academic clothing?

Rather than still hoping that real wealth will come out of money creation, we need fundamentally new ways of thinking. In uncertain times, it is essential, more than ever, to think in scenarios: what can happen in the future, and, what would be the effect on your wealth and capital? How can you protect against adverse scenarios? We thus end by examining the question “what can we do?” from the macro level, discussing the fundamental issue of incentives and of constructing and predicting scenarios as well as developing investment insights.

Good Lord. This paragraph exhibits all the hallmarks of overwrought undergraduate writing. It reads like a parody generated by the Thomas Friedman column generator Pejman links to below.

By “fundamentally new” (the author of that phrase must be talking to Newt’s speech-writing team), they mean old-fashioned, right?

Trying to balance the budget during economic downturns can make things worse, Keynes said. A deficit in these circumstances is good even if — especially if — it causes inflation. For unemployment to drop, real wages must fall. Labor unions that would never accept direct pay cuts could if they were disguised by inflation.

Keynes didn’t approve of budget deficits or inflation, per se. What he proposed in the General Theory was a remedy appropriate only for a particular set of circumstances. When times were good, governments should run surpluses to make up for deficits during hard times, Keynes said.

The great flaw in Keynes’ thinking was his assumption government could act wisely and impartially to stimulate the economy. Spending is popular, tax increases unpopular, in good times as well as bad. So politicians run deficits year after year. Debt mounts. Inflation eats away the savings and investments of the industrious and prudent.

He has Keynes – properly understood – and Hayek on the same side. The problem is, he claims, is that those who claim to be Keynesians don’t know what he was saying.

If the blurb is reflective of the contents of the paper, the paper would reject the premises held by the majorities of both political parties for the past 2 – 3 decades. When the GOP’s “growth” mantra is examined one finds what is being touted is more debt financed consumption and the Dems. stick to their debt financed government spending.

Only Ron Paul and a few others would be comfortable embracing the conclusions of this paper. Unfortunately I think the contents are best describe as uncommon sense.

I don’t know if I’d call that bit o’ writing “formal academic clothing.” That second paragraph reads more like how one might teach a middle school student – certainly not a fundamental new way of thinking that the author thinks it is.

Then again, that might be just the approach needed, given our system of education. Common sense risk evaluation might just be a fundamentally new way of thinking for many folks these days.

Rather than still hoping that real wealth will come out of money creation, we need fundamentally new ways of thinking. In uncertain times, it is essential, more than ever, to think in scenarios: what can happen in the future, and, what would be the effect on your wealth and capital? How can you protect against adverse scenarios?

We used to call it “thinking ahead.” Now it’s thinking in scenarios. It’s not exactly a new way.

Maybe in five years they’ll discover “premises,” “conclusions,” and … and … something they’ll call lojik. It’ll be all the rage.

As a member of the academic economics community, let me point out first, I never have even heard of this forum (it’s Swiss, so it’s supposed to be a secret ;) And it’s just a paper someone posted, not peer reviewed that I can see. Neither author is trained in economics. (One is from the physics side.) Chances are it only cost the time these two took to write it, meaning we lost whatever else they might have done instead.

I’m not going to bother reading the rest of the paper. I just would like to be sure you don’t judge all economic research by this one example. There are thousands of papers worse, and thousands better.

I think this means my late father could have been a major figure in economics without having been to college. Don’t spend it all, save for a rainy day, waste not want not… He should have gotten the Nobel, not that dingdong who spews for the Times.

jetstream: The authors of this paper don’t seem to have even an elementary understanding of monetary theory, wealth creation, productivity, the importance of credit for economic growth or economic growth.

An executive summary of the paper? … it’s the economic equivalent of junk science.

On one hand, when they say things like “This transition, starting in the early 1980s, was further supported by a climate of deregulation and a massive growth in financial derivatives designed to spread and diversify the risks globally. The result has been a succession of bubbles and crashes…” I’m inclined to agree with you: we have the standard bogeymen (deregulation and derivatives) and the implication there were no bubbles or crashes before the 1980s (hysterical, literally and figuratively).

But, I have to say, “monetary theory, wealth creation, productivity, the importance of credit for economic growth” falls into the same snake-oil category: it’s the stuff we’ve currently got, and doesn’t work.

So the call for different thinking is warranted—it just won’t come from them or the established economic community.

To give just a taste of how old and tired the rants against “deregulation” and “derivatives” are:

“This book helped define international finance as a niche in its own right, and international finance instructors are becoming increasingly conversant with derivatives, just at a time when regulators appear bound to drive these contracts out of society to carry off the evil of financial collapse.”